Multinational companies adopt a uniform policy in respect of their employees' salaries. In many cases, employees are transferred from one country to another. Therefore, there has to be continuity and consistency in their remuneration, despite different local tax laws and social security regulations.

In many cases, expatriate employees are paid a part of their remuneration outside India. But even the part of remuneration paid outside India, on which tax at source should be deducted, is taxable in India. Where the tax is not deducted at source, the consequences are as under:

• The employer responsible for deducting the tax at source shall be liable to pay the amount short-deducted or not deducted, along with interest, under Section 201 of the Act.
• In addition to paying the short-deducted tax, the employer may also be liable to pay, by way of penalty, a sum equal to the amount of tax which it failed to deduct or pay to the government of India.
• In principle, the remuneration to expatriate employees for services rendered in India is acceptable as allowable deduction in computing the profits attributable to Indian operations.
• But no deduction will be permissible under Section 40 (A) (I) unless the tax is deducted at source and paid to the government.

However, Section 273 B provides that no penalty shall be imposed for the failure to deduct the tax at source if it is proved that there was reasonable cause for the said failure.

In the context of what is a reasonable cause, reference is invited to the Commissioner of Income-tax versus Itochu Corporation. M/s. Itouch Corporation, a company incorporated in Japan, had a liaison office in Delhi. Japanese employees working in the Delhi office were paid a part of their salary outside India. However, neither was the same reflected in the return, nor were the taxes deducted at source. After a notice was issued, the company filed revised computation for different periods showing the amount paid to the employees in Japan. The company also paid the amount which was short-deducted. Thereafter, proceedings under Section 271C of the Income-tax Act, 1961, came to be initiated and the assessing officer imposed a penalty on the company for the failure to deduct the tax at source.

The tribunal deleted the penalty by observing: "After examining the ratios of the various case laws, referred to above and the facts of this case, we are of the opinion that there was a reasonable cause for not deducting the tax at source on account of emoluments paid to the expatriate employees outside India and hence no penalty under section 271C is exigible by the alleged default."

The decision of the tribunal was upheld by the Delhi High Court.

The above principle was upheld in a recent case of Commissioner of Income-tax versus NHK Japan Broadcasting Corporation.

A careful reading of the above cases will show that penalty leviable for non-deduction of tax at source can be avoided if the employer readily pays the tax, files a revised return and co-operates with the tax department.